Can You Sell Term Life Insurance Policies?

Life insurance policies, including term life insurance, can represent a significant financial asset. While not sold like physical property, term life policies can still hold value that policyholders may access. Mechanisms exist to derive financial benefit from these policies, even if the original need for coverage has changed. Understanding these options is crucial for policyholders evaluating their financial strategies.

Life Settlements: What They Are and Eligibility

A life settlement involves selling an existing life insurance policy to a third-party investor for a cash sum. This payment is greater than any cash surrender value the policy might have, but less than the full death benefit. The investor becomes the new owner, assumes responsibility for paying all future premiums, and receives the death benefit when the insured individual passes away.

For term life policies, which generally do not accumulate cash value, eligibility for a life settlement depends on specific policy characteristics. Most term policies are not directly eligible unless they possess a conversion feature allowing them to be changed into a permanent life insurance policy. This conversion option is crucial because permanent policies build cash value, making them more attractive to investors. Some non-convertible term policies might qualify under limited circumstances, particularly if the insured has a life-limiting health condition.

The insured individual is usually 65 years of age or older, though younger individuals with a terminal or chronic illness may also qualify. A declining health condition or a significant health change since the policy was issued can increase eligibility and potentially the offer value, as a shorter life expectancy makes the policy more appealing to investors.

The policy itself must have a face value, or death benefit, of $100,000 or more. The policy must also be active and transferable. It generally needs to have been in force for at least two years, and in some instances, up to five years.

The Life Settlement Process

Initiating a life settlement begins with contacting a licensed life settlement broker or provider. These professionals can help determine if a policy is a viable candidate and guide the policyholder. The initial phase involves submitting an application, detailed policy information, and a signed medical records release form.

Following submission, the provider evaluates the policy and the insured’s health status. This underwriting process includes assessing medical history, age, and other factors to estimate the insured’s life expectancy. This assessment helps determine the potential value of the policy to an investor. Buyers then use this information to generate potential offers.

Once offers are received, they are presented to the policyholder for review and acceptance. If an offer is accepted, a purchase agreement is executed, outlining the terms of the sale. The legal transfer of policy ownership and beneficiary rights to the buyer is then completed.

Upon successful transfer, the original policyholder receives a lump-sum cash payment. The new owner becomes responsible for all future premium payments and will collect the death benefit when the insured dies.

Life settlement proceeds are generally taxable. The amount received up to the total premiums paid (cost basis) is tax-free. Any proceeds exceeding the cost basis, up to the policy’s cash surrender value, are taxed as ordinary income. Any remaining proceeds above the cash surrender value are taxed as capital gains. Viatical settlements, for individuals with a terminal or chronic illness, may have different tax implications and can sometimes be tax-exempt.

Other Approaches for Term Policyholders

One common approach is converting the term policy into a permanent life insurance policy, such as whole life or universal life. Many term policies include a conversion rider, allowing this change without a new medical examination. This conversion creates a policy with a cash value component, which can then be accessed through withdrawals or loans, or potentially be eligible for a life settlement in the future.

Another option involves utilizing accelerated death benefits, if they are available as a rider on the policy. These riders allow a policyholder to access a portion of their policy’s death benefit while still alive, under specific qualifying conditions like a terminal, chronic, or critical illness. The funds received can be used for medical expenses, long-term care, or other financial needs, though the remaining death benefit payable to beneficiaries will be reduced.

Policy surrender is also an option, though it yields no financial return for term life policies. Unlike permanent policies that accumulate cash value, term policies do not have a cash surrender value. Surrendering a term policy means terminating the coverage and ceasing premium payments, without receiving any funds in return.